Awfully Tricky To Use 13F Filings To Trade Like A Hedge-Fund Titan

By

Brendan Conway

March 28, 2012 3:31 p.m. ET

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Following our post on Global X Funds' filing for ETFs that would mirror the portfolio disclosures of hedge funds and well-known value investors using federal "13F" filings, Ben McMillan at AlphaStratus writes in. He wants to put a finer point on our view that 13Fs are a very imperfect means of replicating what, say, Warren Buffett or John Paulson is doing lately. A 45-day time lag and the incompleteness of 13F disclosures are two of the key reasons why it's awfully tricky to do it on your own, much less with an ETF.

In fact, says McMillan, "most" hedge-fund managers' filings are not suitable for 13F cloning, and a "plain vanilla" attempt is "not only insufficient but actually dangerous." AlphaStratus, which tests the "replication suitability" of a given 13F filer and helps clients build trading around the signal, has identified a host of other issues, from net exposure to turnover. For instance:

The Baupost Group may be "famous and actively followed among the hedge fund enthusiast crowd" but less than half of the total portfolio is in equities, according to AlphaStratus. So there's a very incomplete look through the filings, and probably not much insight to be had.

You can throw out JAT Capital and AQR Capital, whose 13Fs are "virtually useless" because of their low net exposure.

The same goes for Two Sigma and D.E. Shaw, as their high-turnover strategies also make the filings nearly useless.

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